AuthorTopic: LR Paradox (HARD question) (Read 2753 times)

Victor

---- This is one of those questions where I would just guess because the stimulus is so hard to understand. Once again the RC aspect comes to play on LR questions.

Construction contractors working on the cutting edge of technology nearly always work on a "cost-plus" basis only. One kind of cost-plus contract stipulates the contractor's costs; the other kind stipulates a fixed amount of profits over and above costs. Under the first kind of contract, higher costs yield higher profits for the contractor, so this is where one might expect final costs in excess of original costs estimates to be more common. Paradoxically, such cost overruns are actually more common if the contract is of the fixed-profit kind.

Which one of the following, if true, most helps to resolve the apparent paradox in the situation described above?

(A) Clients are much less likely to agree to a fixed-profit type of cost-plus contract when it is understood that under certain conditions the project will be scuttled than they are when there is no such understanding.

(B) On long-term contracts, cost projections take future inflation into account, but since the firugres used are provided by the governement, they are usually underestimated.

(C) On any sizable constrctuion project, the contractor bills the client monthly or quarterly, so any tendency for original cost estimates to be exceeded can be detected early.

(D) Clients billed under a cost-plus contract are free to reveiew individual billlings in order to uncover wasteful expenitures, but they do so only when the contractor's profit varies with cost.

(E) The practice of submitting deliberately exaggerated cost estimates is most common in the case of fixed-profit contracts, because it makes the profit, as a percentage of estimated cost, appear modest.

the paradox is on a cost plus vs fixed percentage the fixed percentage usually doesnt run over while the cost plus does when it should be the other way around.

D. clients dont look at the bill of cost-plus but look at fixed percentage.IE clients are looking for fixed percentage guys to cheat and look at the bill carefully where as they dont look at the cost-plus bills.

there are two kinds of cost plus contracts: 1) those where higher costs yield higher profits for the contractor and 2) those where profits are fixed.

the paradox is that those situations where estimated costs are lower than the actual final costs are more common in the 2nd type of contract, which is not what you would expect since in type 1 a higher cost would mean a greater profit and in type 2 the profit wouldnt change no matter what the cost was.

D explains this by saying that clients under cost plus contracts can review billings but ONLY when they are type 1 contracts.